CHAPTER 8

OVERVIEW OF EQUITY SECURITIES

Presenter
Venue
Date
EXHIBIT 8-1 COUNTRY AND REGIONAL CONTRIBUTIONS
TO GLOBAL GDP AND EQUITY MARKET CAPITALIZATION
(2007)

Source: MacroMavens, IMF World Economic Outlook 2008, Standard &

Poors BMI Global Index weights.
EXHIBIT 8-2 EQUITY MARKETS RANKED BY TOTAL
MARKET CAPITALIZATION AT THE END OF 2008
(BILLIONS OF U.S. DOLLARS)

Source: Adapted from the World Federation of Exchanges 2008 Report (see
http://www.world-exchanges.org).
 EXHIBIT 8-3 REAL RETURNS ON GLOBAL EQUITY
SECURITIES, BONDS, AND BILLS DURING 1900-2008

Source: E. Dimson, P. Marsh, and M. Staunton (2009)

 EXHIBIT 8-6 INTERNATIONAL COMPARISONS OF STOCK
OWNERSHIP IN SELECTED COUNTRIES: 20002008

Source: Adapted from the 2008 Australian Share Ownership Study conducted by
the Australian Securities Exchange (see http://www.asx.com.au). For Australia
and the United States, the data pertain to direct and indirect ownership in equity
markets; for other countries, the data pertain to direct ownership in shares and
share funds. Data not available in specific years are shown as N/A.
 COMMON SHAREHOLDERS

Ownership Share in the operating

interests performance of the company.

Residual Claim on assets after all

claimants liabilities have been paid.

Governance Voting rights on major

participants corporate decisions.
 VOTING RIGHTS

Statutory
voting

Vote by proxy
Voting Cumulative
rights voting

Share
classes
 EMBEDDED OPTIONS

Callable
common
shares Putable common
shares
PREFERENCE SHARES (PREFERRED STOCK)
DIVIDENDS ON PREFERENCE SHARES
POSSIBLE ADVANTAGES OF CONVERTIBLE
PREFERENCE SHARES
PRIVATE EQUITY SECURITIES
INVESTING IN NONDOMESTIC EQUITY
SECURITIES
EXHIBIT 8-16 SUMMARY OF THE MAIN FEATURES OF
AMERICAN DEPOSITORY RECEIPTS

Source: Adapted from Boubakri, Cosset, and Samet (2008): Table 1.

RETURN CHARACTERISTICS OF EQUITY
SECURITIES
EXHIBIT 8-17 IMPACT OF REINVESTED DIVIDENDS ON CUMULATIVE
REAL RETURNS IN THE U.S. EQUITY MARKET: 19002008

Source: Dimson, Marsh, and Staunton (2009).

METHODS FOR ESTIMATING RISK AND RETURN
PREFERENCE SHARES ARE LESS RISKY THAN
COMMON SHARES
EMBEDDED OPTIONS AND RISK

Higher risk:
Callable
Nonputable
Noncumulative

Lower risk:
Noncallable
Putable
Cumulative
WHY ISSUE EQUITY?
GOALS FOR MANAGING EQUITY

Increase net income

Retain more earnings
Issue shares

Manage investors
expectations
ACCOUNTING RETURN ON EQUITY (ROE)
Financial Year Ending
31 Dec 2008 31 Dec 2007 31 Dec 2006
Pfizer
Net income $8,104,000 $8,144,000 $19,337,000
Total stockholders equity $57,556,000 $65,010,000 $71,358,000

NIt
ROE t
BVE t BVE t 1 / 2
$8,144,000
ROE 2007 11.9%
($65,010,000 $71,358,000) / 2
$8,104,000
ROE 2008 13.2%
($57,556,000 $65,010,000) / 2
 MARKET VALUE, BOOK VALUE, AND
PRICE-TO-BOOK RATIO

Market value of equity = Market price per share Shares outstanding

Market value of equity = US$16.97 6,750,000 = US$114,547,500

Book value of equity per share = Total shareholders equity/Shares

outstanding
Book value of equity per share = US$57,556,000/6,750,000 = US$8.53

Price-to-book ratio = Market price per share/Book value of equity per share
Price-to-book ratio = US$16.97/US$8.53 = 1.99
THE COST OF EQUITY
 INVESTORS REQUIRED RATE OF
RETURN

Investors minimum required rate of Cost of

return equity

Estimate with pricing models:

dividend discount model (DDM),
capital asset pricing model (CAPM),
etc.
 SUMMARY

Types of equity securities

Importance and relative performance of equity securities
Ownership characteristics and voting rights
Investing in nondomestic equities
Risk and return characteristics
Market value and book value
Cost of equity, (accounting) return on equity, and investors
required return